Rosenfeld sneaks Cadbury deal past Buffett

Irene Rosenfeld is clearly feeling lucky. The Kraft boss upped her price to secure Cadbury’s agreement to a takeover. But in reducing the stock component, she also removed a disapproving Warren Buffett’s chance, as Kraft’s biggest shareholder, to vote against the deal.

The Berkshire Hathaway boss had already expressed concern about the deal Rosenfeld was lining up for the British confectioner. Now, the Nebraskan investing legend has gone on the record with CNBC saying he is doubtful of the terms Rosenfeld agreed with Cadbury this week and would vote against the transaction if he could.

But he can’t. Rosenfeld increased Kraft’s bid for Cadbury to 850 pence a share, some $19 billion all-in, to secure her target’s agreement. But by increasing the cash component, she reduced the stock Kraft needed to issue to some 18 percent of what was already outstanding, neatly ducking under the 20 percent threshold that would have required shareholder approval under New York Stock Exchange rules.

Reducing the stock on offer does, as it happens, nod to one of Buffett’s objections, namely that Kraft’s stock is undervalued and so makes an expensive acquisition currency. And other influential shareholders support the deal, including Bill Ackman of activist hedge fund Pershing Square.

But it’s gutsy to go against a big shareholder, especially one with Buffett’s aura. Sure, it’s a business disagreement that appears to be primarily about the price Kraft is paying rather than overall strategy — Buffett says he won’t sell his shares and still speaks highly of Rosenfeld. Even so, it leaves her especially exposed to the slightest mishap in delivering on Cadbury’s promise.

The Kraft chief must be aware of this. And it looks as if there is a margin of safety in the targets she has set herself. The stated expectations for cost savings have barely changed since the cheese and cracker maker’s initial hostile bid. With Cadbury now on board, it should be possible to cut more than the mooted 7 percent or so of sales — and the estimated cost of getting there looks padded, too.

If Kraft shares do strengthen sustainably, Rosenfeld will no doubt gladly debate Buffett about whether they did so because of, or in spite of, the Cadbury deal. Rosenfeld’s alternative — defending a deal done against Buffett’s judgment with nothing in Kraft’s share price to show for it — would be a much less attractive proposition.